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Rating action

Scope Ratings GmbH (Scope) has downgraded the issuer rating and the senior unsecured debt rating on Hungarian metalworking company MetMax Europe Zrt. to B and changed the Outlook to Stable from Negative.

Rating rationale

The rating action mainly reflects Scope’s downward revision to the assessment of the company’s financial risk profile following a further decline in profitability in 2022 and revised expectations for profitability in 2023-24. The gloomy outlook overall and the company’s fragile business model given its product and customer concentration also played a role in this decision.

The business risk profile assessment (unchanged at B) is constrained by the company’s size, low product diversification and high customer concentration. Yet the assessment is still supported by MetMax’s profitability as measured by the Scope-adjusted EBITDA margin in the context of the peer group, despite another decrease in profitability in 2022.

The Scope-adjusted EBITDA margin declined for the second year in a row, from 20.2% in 2021 to 19.7% in 2022. The decline is due in particular to continued pressure on wage costs; several salary rounds during 2022 caused personnel costs to rise by 31% compared to the previous year. High rates of overtime along with the usual Saturday shifts to clear order backlogs and provide additional volume to meet high demand also drove up personnel costs. The gross profit margin remained almost unchanged at 47.0% compared to 46.9% in 2021. This was thanks to higher costs for raw materials, tooling and energy due to higher procurement prices being offset by savings on purchased services, mainly due to lower rental costs as MetMax moved into its own building.

The roughly 25% increase in revenue to HUF 5.0bn in 2022 vs HUF 4.0bn in 2021 more than offset the lower Scope-adjusted EBITDA margin. This resulted in an improvement in Scope-adjusted EBITDA to HUF 991m in 2022 from HUF 815m in 2021.

Based on unaudited figures, MetMax’s revenue increased by 5.4% YoY to HUF 2.6bn after H1 2023 compared to HUF 2.4bn after H1 2022. Domestic sales were 10% lower YoY at HUF 1.3bn. Given price increases in early 2023 for its main customers, this points to a sharp drop in volumes in the first half of 2023. In contrast, export revenues increased by 31% YoY to HUF 1.2bn.

Despite higher revenues, reported EBITDA of HUF 470m in H1 2023 was lower than last year’s HUF 559m as another sharp increase in personnel costs (+25% YoY) weighed on MetMax’s profitability. The reported EBITDA margin decreased to 18.4% in H1 2023 compared to 23% in H1 2022.

For the full year 2023, MetMax has guided for revenue growth of between -3% and +3%. Based on 5.4% revenue growth in the first half of 2023, this means the company expects lower revenue growth in the second half of 2023. According to MetMax, this outlook reflects increased volatility in demand, with massive shifts needed each month and quarter to optimise customer stock levels. For 2023, Scope currently expects revenue of HUF 4.9bn. The current outlook for 2024 is very uncertain and has recently deteriorated. Due to relatively short lead times (30-60 days on average), the current order backlog does not provide any visibility into 2024. Given the company’s fragile business model, with its high product and customer concentration, Scope sees increased risks for 2024 and has factored in lower revenue of HUF 4.6bn for 2024.

Considering the continued pressure from rising personnel costs, the agency has revised its expectation for the Scope-adjusted EBITDA margin downwards and forecasts this margin will remain well below 20%.

The downgrade of the financial risk profile to B+ from BB- reflects Scope’s revised expectation for profitability in 2023-24, now with weaker expected credit metrics.

Based on these adjustments, Scope calculates Scope-adjusted debt of HUF 5.56bn at year-end 2022 vs HUF 5.5bn at year-end 2021. At the end of 2022, MetMax Europe completed a merger of Vagyonkezelő Kft. with MetMax Europe. The merger did not create any additional debt as MetMax Vagyonkezelő Kft. financed its investment programme with intra-group loans from MetMax Europe and subsidies.

H1 2023 saw MetMax agree on a green financing facility of up to HUF 434m with Raiffeisen Bank for the construction of photovoltaic power plants. This line is due in December 2023. It has a fixed interest rate of 5% (HUF basis) as part of the EXIM Bank-refinanced Baross Gábor programme. The line is currently undrawn and open for disbursement until 31 December 2024. Scope expects MetMax to call this line in 2024. Scope also expects no additional debt will be raised in 2023 and sees Scope-adjusted debt at around HUF 5.5bn at year-end 2023 and around HUF 5.4bn at year-end 2024.

Leverage as measured by the Scope-adjusted debt/EBITDA ratio improved to 5.6x in 2022 from 6.7x in 2021, driven by the increase in Scope-adjusted EBITDA as higher revenue more than offset the lower margin. Based on its revised expectations for Scope-adjusted EBITDA and the expected increase in Scope-adjusted debt in 2024, Scope sees the Scope-adjusted debt/EBITDA ratio at around 6.0x in 2023 and around 7.5x in 2024.

Due to higher Scope-adjusted EBITDA, the interest coverage ratio improved slightly to 5.9x in 2022 compared to 5.1x in 2021. When calculating this ratio, Scope considers the “gross interest” expense rather than “interest net” due to intra-group charges. Since there is almost no debt apart from the fixed-interest bond, there is no interest rate risk either. The agency sees interest cover of around 5.5x in 2023 and around 4.0x in 2024.

Internal cash flow generation with positive Scope-adjusted free operating cash flow (FOCF) since 2013 is a supportive factor for MetMax’s financial risk profile. In 2022, Scope-adjusted FFO increased to around HUF 833m from HUF 612m in 2021, supported by higher Scope-adjusted EBITDA. In contrast, the Scope-adjusted FOCF of MetMax Europe (excluding MetMax Vagyonkezelő Kft.) fell to HUF 431m in 2022 from HUF 569m in 2021 due to an increase in inventories and higher investments. In H1 2023, unaudited reported FOCF was HUF 63m (HUF 144m in H1 2022). This was because higher capital expenditure (HUF 435m in H1 2023 compared to HUF 188m in H1 2022) impacted FOCF due to the consolidation of MetMax Vagyonkezelő Kft.

Scope anticipates lower investments of around HUF 600m in 2023-24 because most of the investments under the HIPA programme have already been made by MetMax Vagyonkezelő Kft. and the HIPA programme is being phased out.

For 2023 as a whole, the agency expects Scope-adjusted FOCF to remain positive at around HUF 230m, although this is well below the 2022 level. Scope does not expect the gradual normalisation of NWC to offset the expected weaker revenues or the downward revision of the Scope-adjusted EBITDA margin, and it sees Scope-adjusted FOCF relatively unchanged at around HUF 230m in 2024.

Supported by higher Scope-adjusted FFO, the Scope-adjusted FFO/debt ratio improved to 15% in 2022 from 11% in 2021. For 2023 and 2024, Scope expects a Scope-adjusted FFO/debt ratio in the range of 10%-15%.

Cash flow cover (excluding the consolidation of MetMax Vagyonkezelő Kft.) fell slightly to 8% in 2022 from 10% in 2021 due to lower Scope-adjusted FOCF. Based on its current expectations for Scope-adjusted FOCF, Scope sees cash flow coverage of less than 5% in 2023 and 2024.

MetMax tells Scope that it has started discussions with HIPA about the possible launch of a new programme to support the next five years of investment activity. MetMax does not expect the negotiations to yield any results before H2 2024. Approval could lead to higher investments and burden cash flow coverage. Due to the uncertain outcome of these negotiations, the agency has not included this scenario in its current base case.

Scope considers MetMax’s liquidity and financial flexibility to be ‘adequate’, supported by 100% coverage of upcoming maturities from available cash, particularly the NHP Hajrá line due in January 2024 and the bond redemption starting in 2025 (10% each year between 2025 and 2029 and 50% in 2030).

Scope still sees a high risk to key personnel (ESG factor) as it believes MetMax’s business is still dependent on András Csoma, the CEO and majority owner (54%). However, the agency has a positive view on the transformation of the operational side of the organisation in general and the expansion of management in particular.

One or more key drivers of the credit rating action is considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that MetMax’s Scope-adjusted FOCF/debt ratio will remain between 0%-5% in 2023-24 and that MetMax will be able to manage its upcoming maturities (NHP Hajrá line due in January 2024 and bond redemption starting in 2025) using its cash flow. MetMax says it has started discussions with HIPA about the possible launch of a new programme to support the next five years of investment activity. Approval could lead to higher investments and burden cash flow coverage. Due to the uncertain outcome of these negotiations, the agency has not included this scenario in its current base case.

Scope could consider a positive rating action if the Scope-adjusted FOCF/debt ratio improved to above 5% on a sustained basis, e.g. due to revenue growth and/or an improvement in profitability.

A negative rating action could be triggered if the Scope-adjusted FOCF/debt ratio turned negative on a sustained basis. This could be due to lower revenues and/or lower EBITDA margins from rising staff costs or capital allocation that goes beyond the current plan. Liquidity problems, especially against the backdrop of upcoming maturities, could also lead to a negative rating action. In this context, Scope notes that MetMax’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires MetMax to repay the nominal amount (HUF 5bn) within 10 business days after the bond rating falls below B- (there is a two-year cure period for a B/B- rating), which could have default implications.

Long-term debt rating

MetMax issued a HUF 5.0bn senior unsecured bond in December 2020 with a 10-year maturity (amortising 10% every year during 2025-29 and 50% in 2030) and a coupon of around 3% p.a. under the Hungarian Central Bank’s bond scheme. Bond proceeds of about HUF 2bn were transferred to sister company MetMax Vagyonkezelő Kft. for investments to expand production capacity, while around HUF 3bn was transferred to 100% parent CNC Tőkebefektető Kft. to repay debt related to a management buyout and the acquisition.

In line with the issuer rating, Scope has downgraded the senior unsecured debt rating to B. The senior unsecured debt rating is still based on ‘average’ recovery prospects in a simulated event of default.

Scope’s recovery analysis uses the liquidation value of HUF 4.1bn for a hypothetical default scenario in 2025. This value is based on a haircut on the assets and reflects liquidation costs of 10% for the assets. The haircut also assumes that the intra-group receivable from the parent (used to refinance the acquisition debt) would become non-recoverable in the event of a payment default.
 
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 16 October 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the Rated Entity or Related Third Party participation    YES
With access to internal documents                                       YES
With access to management                                                YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Gennadij Kremer, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 October 2020. The Credit Ratings/Outlook were last updated on 11 November 2022.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.
 
Conditions of use/exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.